This study examines the determinants of cross-country variation in foreign direct investment, using both OLS and instrumental variable techniques. The study looks at four main areas: government fitness, market fitness, educational fitness and socioculture. For all countries the concept of government fitness is the most important characteristic for attracting FDI, followed by market fitness. However these measures lead to the conclusion that different characteristics between developed and developing countries are important to determine foreign direct investment flows. For developing countries, the factor that explains the majority of FDI flows is the level of corruption of the government. Whereas developed countries, economic openness effects FDI the most. Both of these factors are considered measues of government fitness. Other factors that significantly determine FDI for developing countries are market size, credit market quality and development, and urban population. One interesting finding for all country types is that education of the population (human capital) was not significant. By identifying certain characteristics, countries can focus policies on them to increase FDI. Increasing FDI has many other benefits than just capital accumulation, like technology transfers, human and physical capital accumulations too.
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